Talk Point: Has Modi waited too long in his tenure to woo investors in Davos?

Narendra Modi is the first Indian Prime Minister to attend the World Economic Forum summit in Davos since H.D. Deve Gowda in 1997. But he is going at a time when domestic employment and economic growth have been sluggish.

ThePrint asks: Has Modi waited too long in his tenure to woo investors in Davos?

Indian economy has crossed the period of rock-bottom

Dharmakirti JoshiChief Economist at CRISIL

From an economic perspective, 2018 will be a year of opportunities with some risks thrown in. The government has carried out GST reforms, which will pay off over the next couple of years. Economic indicators are firming up slowly. The economy has crossed the period of rock-bottom and is on an upward trajectory.

The government can always argue they have followed the path of fiscal prudence and the central bank is focused on inflation control under the new inflation targeting regime. GST and bank recapitalisation should start paying off from 2018.

Initially, like with any changes, there was disruption. Once the disruptions settle, the consequent problems will get solved and give the required push to efficiency and lift the medium-term growth trajectory.

There are, of course, risks. The prices of oil are rising which is a major influence on the Indian economy as it stresses the twin deficits (fiscal and current account) and also creates inflationary pressures.

Moreover, global economy and trade have been on an upturn but India hasn’t been able to take advantage of that so far. This will all follow once the GST related glitches get sorted.

The ‘Sell India’ pitch reverberates true. We tided over the initial phase of transition to a more formalised economy. Formalisation of the economy, in addition to lifting the tax base, also creates conditions for social security and more benefits for the working class in addition to lifting the tax base.

Asset prices across the world are at an all-time high but consumer inflation is low. This situation is not peculiar to India. Most countries are facing the same situation.

The problem is that nothing in economics is guaranteed. However, if we are able to pull off reforms in power, public banking and streamline GST, it will create a platform for a stronger economy.

Modi’s meetings in Davos are a critical part of the ‘sell India’ campaign

Rajesh ChakrabartiProfessor and Vice-Dean at the Jindal Global Business School, O.P. Jindal Global University

The current economic growth indicators appear to be on the lower side compared to a few years ago. But one can’t say it’s very slow. The numbers also seem to be recovering. The stock market valuations, which constitute a leading indicator of economic activity, indicate strong investor confidence.

However, stock markets mostly reflect the faith in the organised sector. The organised sector may form a large part of the productive system but forms a rather small part of the employment eco-system. It produces over two-thirds of the GDP but provides only 10-15 per cent of employment.

Modi has systematically trying to formalise the Indian economy by tilting the balance towards the formal sector. Demonetisation did exactly that, it provided advantages to, say, a Reliance Fresh over the street side vendor who could not deal in virtual transactions.

Even GST tilts the balance in favour of the corporate sector. This approach has its benefits and problems. India’s informal sector may be a little inefficient but it employs over 80 per cent of the country. This has implications for income inequality.

The growth may disappoint, but even within the broad 6.5-8 range, India will remain one of the fastest growing large countries today.

On the foreign policy front, Modi has made unrelenting efforts to promote India globally. His foreign policy can certainly not be criticised for lack of energy, particularly in the economic diplomacy fora. His government’s focus on ease-of-doing business, entrepreneurship and start-ups in India, are creating an image of India that is net-friendly and technologically savvy.

Given that India is one of the fastest growing large countries in the world, it is not surprising that it would attract attention of other countries and global investors. Nevertheless, showing India’s willingness to engage is also important. The meetings in Davos are therefore a critical part of the ‘sell India’ campaign.

However, the economic impact of such meetings is always nebulous and effective in the medium and long run. Immediate returns over the next couple of quarters is unlikely but it is critical to attract investments in the longer run. The recognition of India’s importance at Davos augurs well for the nation in the long run, but it is best not to expect it to alter the economic reality in the short-term.

When Deve Gowda went to Davos in 1997, India was not in the picture at all. It was all about China.

What happens at Davos? Do the captains of industry who go there make investment decisions? Is this where investors decide what country they must go to next? A hundred of the world’s largest companies are represented here through their CEOs. India has sent a hundred-strong delegation led by the Prime Minister himself. Do the CEOs at Davos want to hear a sales pitch from India’s CEO?

There is no doubt that investors and firms are interested in India. It is clearly one of the world’s largest growing economies, which will grow at around 7 per cent for at least the next 10 years. India also has a middle class that will become the world’s largest within the next 10 years. When former PM Deve Gowda, the last Indian PM to go to Davos in 1997, spoke there, India was not in the picture at all. Davos was then and for several years, all about China.

Now the competition for India will be, ironically from the US. Trump’s moves by way of reducing corporate taxes and taxing foreign firms will encourage firms to invest within the US. India is also not improving its ease-of-doing-business enough, languishing still at rank 100.

What may not help are columns in the Financial Times and the New York Times that highlight gender and caste-based violence in India. What also will not help is the signal that goes when the rule of law seems to be threatened to the extent that the Supreme Court judges talk of democracy being threatened.

Modi is certainly a persuasive speaker and has swayed domestic audiences and NRI crowds with his appeal to nationalistic sentiments. But this might not cut ice among foreigners. His speech might please his audiences back home but is this what foreign investors are looking for? What would help is if the corporate leaders and state government leaders who have accompanied the Prime Minister are able to provide the CEOs present there enough encouragement and confidence. Then we might see some benefits, in the long run.

Modi never allows reality to interrupt his sale of dreams

NarendarPaniProfessor and economist, National Institute of Advanced Studies

Prime Minister Narendra Modi’s hard-sell of the Indian economy in Davos comes just a day after the World Economic Forum’s Inclusive Development Index ranked India far below Nepal, Bangladesh, Sri Lanka and Pakistan, not to mention China. The choice of a strongly positive approach despite reality pointing in other directions can be attributed to two features that have come to mark Modi’s economic policy, one his own and the other inherited.

The ability not to allow reality to interrupt his sale of dreams is a feature that is unique to Modi. It was this trait that contributed substantially to his electoral victory in 2014 and Modi has seen no reason to confine this approach to national boundaries. While the campaign style public meetings in foreign lands may have ebbed, there is no let-up in his belief that exaggeration is the most effective way of making his case. This marked change from the understatement of his predecessor is unlikely to go unnoticed in international fora, with its inevitable effect on the credibility of the case Modi is trying to make.

Beyond his personal style, the fact that Modi has gone to Davos 20 years after the last Indian prime minister, H.D. Deve Gowda, did so, and with the largest-ever delegation, also suggests a touch of desperation. And at least a part of this dire need to woo foreign capital has been inherited from Modi’s predecessors. India’s economic policy makers have consistently played down the task of mobilising domestic resources. This has led to a decline in the share of domestic private investment in GDP and hence a greater dependence on foreign investment. Indeed, steps have been taken, such as shutting down regional stock exchanges, which further curtail domestic investment. In the midst of this ever-growing need for foreign capital Modi has apparently decided it is time to lend his charisma to the task.

1 COMMENT

January 2015 would have been ideal. That visit should have been preceded by a reformist Budget and many signs that, despite the troubled economy that had been inherited, this was an administration that would strike as new a path as 1991. The record of management of the economy over the last four years is an open book. The business people who assemble at Davos have access to the finest information and analysis, especially as it concerns their enterprises. They are a discerning lot. Let this visit be treated as an investment for the next term.